Technical Report

• The Bottom Line: A technical report is a mandatory disclosure document for mining and energy companies, written by geologists and engineers, that attempts to quantify the valuable resources hidden underground; for a value investor, it's a critical but complex tool for separating plausible business cases from speculative fantasies.
• Key Takeaways:
• What it is: An expert's detailed assessment of a company's mineral or energy assets, covering the quantity, quality, and economic viability of the deposit.
• Why it matters: For companies whose primary asset is a hole in the ground (like miners), this report is the foundation of their entire intrinsic value. It's filled with crucial assumptions that can make or break an investment thesis.
• How to use it: A value investor must learn to read it defensively, focusing on proven and probable reserves over speculative resources, and relentlessly questioning the economic assumptions used.

Imagine you're considering buying a large, undeveloped plot of land because you've heard rumors of buried treasure. You wouldn't just take the seller's word for it. You'd hire a team of independent experts—surveyors, geologists, and maybe even a treasure-hunting veteran—to give you a detailed, unbiased assessment. They would drill core samples, analyze the soil, estimate the probability of finding anything, and calculate the potential cost of digging it all up. A technical report is precisely that expert assessment, but for a publicly traded mining, oil, or gas company. In the world of investing, you can't just say, “We think there's a lot of gold in this hill.” Securities regulators in countries like Canada (with its NI 43-101 standard) and Australia (with the JORC Code) require companies to produce these standardized reports to protect investors from misleading claims. These documents are written by a “Qualified Person” or “Competent Person”—an accredited and independent geoscientist or engineer—who puts their professional reputation on the line with their findings. The report translates complex geology into the language of business by categorizing the underground assets into different levels of confidence: 1. Mineral Resources: This is the “what we think is there” category. It's an estimate of the valuable material in the ground, but its economic viability hasn't been fully proven. Resources are further broken down by confidence level:

• Inferred: The lowest level of confidence. It's like seeing smoke and guessing there's a fire. It's an educated guess based on limited geological evidence.
• Indicated: A higher level of confidence. You've done more sampling and have a better idea of the size and shape of the “fire.”
• Measured: The highest level of confidence for a resource. You've basically outlined the entire fire and have a very clear picture of it.

2. Mineral Reserves: This is the holy grail for a value investor. A resource only becomes a reserve after a detailed study proves it can be economically and legally mined. This is the portion of the “measured” and “indicated” resources that is actually profitable to extract at a given commodity price. Reserves are also broken down:

• Probable: Good confidence that it can be mined profitably.
• Proven: The highest level of confidence. All the technical and economic studies have been done, and you're virtually certain you can mine this stuff and make money.

Think of it like apples on a tree. Resources are all the apples you can see on the tree, including those on the highest, thinnest branches. Reserves are only the apples you can actually reach with your ladder, pick, and sell at the market for a profit after accounting for your time and effort. Many investors get burned by confusing the two.

“The business schools reward difficult, complex behavior more than simple behavior, but simple behavior is more effective.” - Warren Buffett. While not directly about technical reports, this quote reminds us to cut through the geological jargon and focus on the simple business question: Can this company profitably get this stuff out of the ground?

Value investors, by nature, are deeply skeptical of businesses they cannot understand and whose futures are wildly uncertain. Most mining and exploration companies fit this description perfectly. Their success depends on three highly unpredictable variables: the price of a commodity, the success of a complex engineering project, and the geology of a rock formation miles underground. This is a far cry from analyzing the durable competitive advantage of a company like Coca-Cola or See's Candies. So, why should a value investor even bother with a technical report? Because if you ever find yourself analyzing a company in the natural resources sector—perhaps it's trading for less than its cash on hand, or it's a spin-off from a larger company you own—the technical report is your only anchor to reality. It's the primary tool for assessing the “A” (Assets) in a balance sheet that is otherwise just cash and a dream. Here’s how it aligns with core value investing principles:

• Circle of Competence: Reading a technical report quickly reveals the boundaries of your circle_of_competence. You don't need to be a geologist, but you need to understand the business implications of the geology. The report forces you to ask: “Do I truly understand the risks here? Or am I just gambling on gold prices?” For most, the answer will be the latter, and the wisest move is to walk away.
• Focus on Assets: Value investing often involves looking for businesses with hard assets. In a mining company, the ore body is the asset. The technical report is the official appraisal of that asset. It allows you to attempt a valuation based on what the company owns, rather than what the market hopes it will find.
• Margin of Safety: The entire structure of a technical report is a ladder of uncertainty, from “inferred resources” to “proven reserves.” This provides a perfect framework for applying a margin_of_safety. A prudent investor would base their valuation only on the “proven and probable reserves,” treating all “resources” as a potential bonus. By ignoring the more speculative categories, you build a buffer against geological disappointments and commodity price swings.
• Avoiding Speculation: Benjamin Graham defined an investment as an operation that, “upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” A technical report, when read correctly, is the very definition of “thorough analysis” for a resource company. It helps you identify when a company's stock price is based on proven economics (potential investment) versus hopeful drilling results (pure speculation).

In short, the technical report is a tool for a value investor to impose discipline and realism on an industry that is rife with hype and uncertainty.

You don't need a degree in geology to extract value from a technical report. You need the mindset of a skeptical banker who is being asked to fund the project. Your job is to poke holes in the story.

Here is a practical, step-by-step checklist for a non-expert to review a technical report:

1. Step 1: Check the Author and the Date.
   • Who are the “Qualified Persons” who signed off on the report? A quick search can reveal if they are from a large, reputable engineering firm (like SNC-Lavalin, Hatch, or Ausenco) or a smaller, less-known consultancy. Independence and reputation are key. An old report is also a red flag; geology doesn't change, but economic assumptions (like costs and metal prices) become stale very quickly.
2. Step 2: Jump Straight to the Reserves.
   • Ignore the exciting headlines about “billions of pounds of inferred copper.” Scan the document for the “Mineral Reserve Statement.” This is the number that matters. If the company has no reserves and only resources, it's not a business yet; it's a science project. For a value investor, the analysis often stops here.
3. Step 3: Scrutinize the Economic Assumptions.
   • This is the most important step. The report will be based on a feasibility study that uses a set of assumptions to calculate the project's Net Present Value (NPV) and Internal Rate of Return (IRR). Look for these numbers:
     • Commodity Price: What price for gold, copper, or lithium are they using? Is it higher than the current spot price? A project that is only profitable at a price 30% above today's market is incredibly risky. Conservative assumptions are the mark of a credible report.
     • Operating Costs (OPEX): How much will it cost to mine and process each tonne of ore? Compare this to existing mines in the same region.
     • Capital Costs (CAPEX): How much will it cost to build the mine? Be wary of initial CAPEX estimates; they are notorious for ballooning.
     • Discount Rate: What rate did they use to calculate the NPV? A standard rate is 8%, but for risky jurisdictions or complex projects, a higher rate (10-12%) is more appropriate. A low 5% discount rate can make a mediocre project look fantastic.
4. Step 4: Understand the Study Type.
   • Not all reports are created equal. They are based on different levels of engineering and economic studies:
     • PEA (Preliminary Economic Assessment): The lowest accuracy level (+/- 30-50%). It's a back-of-the-envelope calculation. Treat any valuation based on a PEA with extreme skepticism.
     • PFS (Pre-Feasibility Study): Better accuracy (+/- 20-30%). More detailed engineering work has been done. This is a significant step up.
     • FS (Feasibility Study / Bankable Feasibility Study): The highest accuracy level (+/- 10-15%). This is a detailed blueprint for the mine, and banks will often lend against a positive FS. For a value investor, a project isn't truly de-risked until it has a positive Feasibility Study.

Your goal is not to find a “good” report, but to understand the risks embedded within it.

• A “Green Flag” Report: Describes a project with a robust Feasibility Study, a large proportion of proven reserves, uses commodity prices at or below the current market, and still generates a healthy return (NPV) even after stress-testing the assumptions (e.g., “What happens if costs go up 20%?”).
• A “Red Flag” Report: Is based on a PEA, boasts about massive inferred resources, uses a fantasy commodity price to look profitable, and is located in a politically unstable jurisdiction. This is not an investment; it's a lottery ticket.

By applying this skeptical lens, you can use the technical report to build a massive margin_of_safety or, more likely, to quickly move the company into your “too hard” pile.

Let's compare two fictional gold exploration companies to see these principles in action. Both have a market capitalization of $100 million.

• Company A: “Gold Dream Inc.”
• Company B: “Steady Metals Corp.”

You find their latest technical reports online. Here's a comparative summary:

Value Investor's Interpretation:

• Gold Dream Inc. looks exciting on the surface. “5 million ounces! $500M NPV!” But this is a classic trap. The valuation is based on a low-confidence PEA and a gold price that is over 30% higher than reality. Its “resources” are not “reserves” and may never be economically viable. A value investor sees this as pure speculation. The risk of permanent capital loss is extremely high.
• Steady Metals Corp. appears more modest. It has fewer ounces and a lower NPV. However, its foundation is solid rock. The valuation is based on a high-confidence Feasibility Study and a conservative gold price that is below the current market, providing a built-in buffer. The assets are classified as reserves, meaning they are proven to be economically extractable. While still a risky mining venture, Steady Metals offers a basis for a rational investment decision. You can analyze its $250M NPV against its $100M market cap and begin to assess if an adequate margin_of_safety exists.

This example shows how the technical report, when properly interpreted, acts as a powerful filter to separate speculative hype from potential investment substance.

• Standardization: Regulations like NI 43-101 create a consistent framework, allowing for a more apples-to-apples comparison between projects (if you read the fine print).
• Expert Opinion: It provides access to the analysis of qualified professionals. You are not relying on a CEO's promotional presentation, but on the signed report of an engineer or geologist.
• Forced Disclosure: It compels companies to reveal crucial details about a project's potential flaws, risks, and economic assumptions that they might otherwise prefer to obscure.
• Foundation for Valuation: Despite its flaws, it is the only document that provides the raw data necessary to even attempt a rational valuation of a resource company's primary asset.

• “Garbage In, Garbage Out”: The report's conclusions (like NPV) are extremely sensitive to its inputs. Overly optimistic assumptions about metal prices, recovery rates, or operating costs can make a terrible project look like a world-class deposit.
• Estimates, Not Certainties: The report is a sophisticated estimate. Geology is complex and unpredictable. The actual amount of recoverable metal, or the cost to extract it, can and often does differ significantly from the report's projections.
• Misinterpretation by Investors: The most common pitfall is investors treating “resources” as if they were “reserves,” or accepting the headline NPV figure without critically examining the underlying assumptions.
• Potential for Bias: While “independent,” the Qualified Persons are paid by the company they are evaluating. While outright fraud is rare, there can be pressure to use more favorable (though technically defensible) assumptions to help the company raise capital.

• margin_of_safety
• intrinsic_value
• circle_of_competence
• due_diligence
• risk_management
• assets
• commodity_cycles